3 December 2013
David Cameron said, before the last election: ‘We need to make a really big change: from an economy built on debt to an economy built on savings’
Yet BofE figures show largest fall in long-term savings since 1970s
Short-sighted policy encouraging spending now instead of saving for tomorrow is dangerous for all of us
Chancellor should recognise importance of savers for long-term growth in his Autumn Statement
People taking money out of long-term savings: Analysis of Bank of England figures, showing £23bn has been taken out of long-term savings in the past year, is truly troubling. Cash and instant access account holdings have risen sharply, suggesting people have decided to spend their money now, rather than save for the future. This is the sharpest decline in long-term saving since the crisis years of the 1970s.
Funding for Lending has caused sharp drop in rates as banks don’t need savers’ money: With interest rates having fallen so low, it is indeed not so surprising to see savers giving up on long-term saving, however that is dangerous for all of us. The Bank of England’s Funding for Lending scheme started in July 2012 and caused a sharp drop in savings rates, as banks no longer needed savers’ money because the Bank of England was supplying them will billions of pounds of almost free money.
Savers losing money in real terms month after month as rates stay below inflation: Every economy needs people to be saving for their own future, rather than relying on others if things go wrong. However, in the current policy environment, people are losing money in real terms on their savings accounts month after month, as interest rates have fallen behind inflation, which sends the clear signal that the authorities do not value savers.
Economy is growing, but Bank of England keeps rates low, so savers have given up: Normally, as growth picks up, interest rates would be rising. However, despite the economic rebound, with consumer spending powering ahead and rising mortgage lending and house prices, the Bank of England insists that interest rates will stay near zero for the next couple of years at least. Hardly a surprise that savers are just giving up on the prospect of a fair return on their money.
Short-sighted policy driven more by politics but bad economics: This short-sighted policy may be good politics but it is very bad economics. No economy can thrive in the long run without people saving and investing for the future. If you just withdraw money to spend today, then growth in future will be lower.
Repeating mistakes that led to the crisis – growth based on consumption, borrowing and house price boom: The economic meltdown from which we are now recovering was caused by excess debt, house price inflation and unsustainable borrowing. We seem to be repeating the same mistakes again, rather than learning the lessons of history and encouraging more responsible long-term attitudes.
Policy has destroyed incentives to save: Measures are urgently needed to restore credibility to David Cameron’s pre-election pronouncement that “We need to make a really big change: from an economy built on debt to an economy built on savings.” Sadly, so far, his Government’s policies have destroyed the incentive to save.
Autumn Statement should address problems of savers: I would urge the Chancellor to use his Autumn Statement as an opportunity to recognise the damage done to savers and introduce some measures to improve their position. The following measures would be a good start:
Increase ISA allowances so that savers can at least earn more of their meagre savings income tax free. This is the equivalent of a rise in interest rates. There are rumours that the chancellor is thinking of capping ISA savings, that would be totally the wrong policy decision.
Introduce a special extra ISA allowance for people to use to save for long-term care spending, this money being tax free if spent on care for themselves or a loved one.
Relax restrictions on ISAs so that people can choose whether to hold cash or stocks and shares and move freely between the two and also allow Child Trust Funds to be switched into Junior ISAs.
Reform the annuity markets so that people can get much better value for their long-term pension savings.
Incentivise financial advice in the workplace to help people plan their finances – the current tax relief on financial advice is only £150 per worker, and only covers pension advice, not advice for other long-term savings. This is far too low to deliver meaningful advice.